GBP/JPY holds above 199.00, remains close to multi-month top ahead of UK budget

GBP/JPY pulls back from a multi-month peak, though the downside potential seems limited.
The BoJ rate-hike uncertainty could undermine the JPY and lend some support to the cross.
Traders look to the UK Autumn Budget for short-term impetus ahead of the BoJ on Thursday.

Haresh Menghani FXStreet

The GBP/JPY cross edges lower during the Asian session on Wednesday and erodes a part of the previous day's gains to over a three-month peak, around the 199.70 region. Spot prices, however, lack follow-through selling and manage to hold above the 199.00 mark as trades look to the UK Autumn Budget for some meaningful impetus.

This will be the first budget announcement under the recently elected Labour government where Rachel Reeves, UK Chancellor of the Exchequer, is expected to raise taxes and increase public spending as suggested by Prime Minister Keir Starmer. Traders will keenly focus on the overall spending plans as it will influence the Bank of England’s (BoE) interest rate path, which, in turn, should influence the British Pound (GBP) and provide some meaningful impetus to the GBP/JPY cross.

In the meantime, the possibility of more BoE rate cuts in November and December, bolstered by a fall in the UK Consumer Price Index to the lowest level since April 2021 and below the central bank's 2% target, is seen acting as a headwind for the GBP. The Japanese Yen (JPY), on the other hand, draws some support from fears that authorities will intervene in the market to prop up the domestic currency. This turns out to be another factor exerting some pressure on the GBP/JPY cross.

Meanwhile, the loss of a parliamentary majority by Japan's ruling coalition raised doubts over the Bank of Japan's (BoJ) ability to tighten its monetary policy further. This, along with the prevalent risk-on environment, might keep a lid on any meaningful appreciating move for the JPY and help limit the downside for the GBP/JPY cross. Hence, any subsequent slide might still be seen as a buying opportunity, warranting some caution before confirming that spot prices have topped out.

Pound Sterling FAQs

What is the Pound Sterling?

The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).

How do the decisions of the Bank of England impact on the Pound Sterling?

The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.

How does economic data influence the value of the Pound?

Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.

How does the Trade Balance impact the Pound?

Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.

Author

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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